Tax-deductible investment expenses.

Due to recent tax law changes, certain investment-related expenses are no longer deductible if you itemize. Prior to the passage of the TCJA, taxpayers were allowed a tax deduction for certain expenses known as “miscellaneous itemized deductions.” Miscellaneous itemized deductions included expenses such as fees for investment advice, IRA custodial fees, and accounting costs necessary to produce or collect taxable income. For tax years 2018 to 2025, these deductions have been eliminated. To learn more about these changes check out these articles:

The IRS still lets you deduct certain investment expenses incurred in your taxable brokerage investments. Check with your tax professional to make sure you're taking full advantage of investment interest expenses, and capital losses.

Investment interest expense

If you itemize your deductions, you may be able to claim a deduction for your investment interest expenses. Investment interest expense is the interest paid on money borrowed to purchase taxable investments. This would include margin loans you use to buy stock in your brokerage account. In such cases, you can deduct the interest on the margin loan. (This wouldn’t apply if you used the loan to buy tax-advantaged investments such as municipal bonds.)

The amount that you can deduct in a given year is capped at your net taxable investment income for the year. Any leftover interest expense gets carried forward to the next year and potentially can be used to reduce taxes in the future.

To calculate your deductible investment interest expense, you need to know the following:

  • Your total investment income for investments taxed at your ordinary income rate
  • Your total investment interest expenses (for loans used to purchase taxable investments)

To calculate your deductible investment interest expense, you first need to determine net investment income. This normally includes ordinary dividends and interest income, but does not include investment income taxed at the lower capital gains tax rates, like qualified dividends, or municipal bond interest, which is not taxed. Then, compare your net investment income to your investment interest expenses. If your expenses are less than your net investment income, the entire investment interest expense is deductible. If the interest expenses are more than the net investment income, you can deduct the expenses up to the net investment income amount. The rest of the expenses are carried forward to next year.

Capital losses

Losing money is never fun, but there is a silver lining. Capital losses can be used to offset your capital gains. If your capital losses exceed your capital gains, up to $3,000 of those losses (or $1,500 each for married filing separately) can be used to offset ordinary income and lower your tax bill. Net losses of more than $3,000 can be carried forward to offset gains in future tax years.

For more information about maximizing the tax benefit of capital losses and understanding strategies like tax loss harvesting, see "Reap the Benefits of Tax-Loss Harvesting to Lower Your Tax Bill".

Investment interest expense.

Investment interest expense is the interest on money you borrow to purchase taxable investments. For example, you can deduct the interest on a margin loan you use to purchase stock, but not if you use the margin loan to buy a car or tax-exempt municipal bonds.

There's a cap on deductibility equal to your net investment income, but any leftover interest expense can be carried over for future use, without expiration.

To calculate your net investment income—and therefore how much investment interest expense you can deduct—add up your taxable interest income, ordinary dividends, and even long-term capital gains and qualified dividends (if you make a special election to treat them as ordinary income, more below). Then, subtract any miscellaneous investment-related itemized deductions you actually get to use.


Taxable investment income: $10,000
Investment-related itemized deductions: $5,000
−$1,000 (deductible at your AGI)
Net investment income: $9,000 (deductible investment interest expense)

Note: The remaining $1,000 of unused investment interest expense can be carried forward and potentially used in future years.

How do the qualified dividend rules impact investment interest expense?

Qualified dividends.

Qualified dividends that receive preferential tax treatment aren't considered investment income for purposes of the investment interest expense deduction.¹ However, you could elect to treat qualified dividends as ordinary income (just as you can with net long-term capital gain income) to boost the amount you can deduct as investment interest expense. The concept here is that it's better to pay 0% tax on qualified dividends than 15% or 20% tax.

Let's go back to the example: If you also have $1,000 of qualified dividends, you could pay 15% (or 20%) tax on them, or you could elect to treat those dividends as ordinary income and boost your net investment income from $9,000 to $10,000—which means you could now deduct up to $10,000 in investment interest expense in the current year.

Payment in lieu of dividends.

If you buy dividend-paying stock on margin and your broker lends out the stock, you don't really receive dividends, you receive payment in lieu of dividends. These payments are treated as ordinary income and aren't eligible for the qualified dividend rate. But all is not lost: The payments are eligible to offset your investment interest expense.

However, if you already have sufficient ordinary investment income from other sources (or more payment in lieu of dividends than can be used), you're stuck with ordinary tax treatment.

Capital losses.

Capital losses can be used to offset capital gains without limit in any given year. If your capital losses exceed your capital gains, up to $3,000 in losses (or $1,500 each for married persons filing separately) could be used to offset ordinary income. Net losses of more than $3,000 can be carried forward to offset gains in the future without expiration during your lifetime.

Reminder on cost basis reporting rules.

For more information on investment expenses, how to report all kinds of investment income (including mutual funds), and the rules for netting short-term and long-term capital gains, see IRS Publication 550: Investment Income and Expenses.

Be sure to consult your tax professional about your unique situation, preferably well before the end of the year. And no matter the time of year, it's also a good idea to check with your tax advisor before you enter into any transaction that might have significant tax consequences.

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